SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-22784
GATEWAY, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 42-1249184 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
14303 Gateway Place
Poway, California 92064
(Address of principal executive offices, zip code)
Registrant’s telephone number, including area code: (858) 848-3401
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
As of August 2, 2004 there were 372,696,800 shares of the Common Stock of Gateway, $.01 par value per share, outstanding. As of August 2, 2004 there were no shares of Gateway’s Class A Common Stock, $.01 par value per share, outstanding.
GATEWAY, INC
FORM 10-Q
For the period ended June 30, 2004
| ITEM 1. | FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three and six months ended June 30, 2004 and 2003
(in thousands, except per share amounts)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net sales |
$ | 837,592 | $ | 799,639 | $ | 1,705,975 | $ | 1,644,090 | ||||||||
| Cost of goods sold |
821,534 | 661,981 | 1,581,588 | 1,400,198 | ||||||||||||
| Gross profit |
16,058 | 137,658 | 124,387 | 243,892 | ||||||||||||
| Selling, general and administrative expenses |
353,549 | 212,266 | 649,573 | 520,613 | ||||||||||||
| Operating loss |
(337,491 | ) | (74,608 | ) | (525,186 | ) | (276,721 | ) | ||||||||
| Other income, net |
1,700 | 4,825 | 7,867 | 9,239 | ||||||||||||
| Loss before income taxes |
(335,791 | ) | (69,783 | ) | (517,319 | ) | (267,482 | ) | ||||||||
| Benefit for income taxes |
— | — | 12,785 | — | ||||||||||||
| Net loss |
(335,791 | ) | (69,783 | ) | (504,534 | ) | (267,482 | ) | ||||||||
| Preferred stock dividends and accretion |
(2,790 | ) | (2,784 | ) | (5,579 | ) | (5,566 | ) | ||||||||
| Net loss attributable to common stockholders |
$ | (338,581 | ) | $ | (72,567 | ) | $ | (510,113 | ) | $ | (273,048 | ) | ||||
| Basic and diluted net loss per share |
$ | (0.91 | ) | $ | (0.22 | ) | $ | (1.44 | ) | $ | (0.84 | ) | ||||
| Basic and diluted weighted average shares outstanding |
372,436 | 324,072 | 353,918 | 324,072 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 2004 and December 31, 2003
(in thousands, except per share amounts)
| June 30, 2004 |
December 31, 2003 |
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| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 271,532 | $ | 349,101 | ||||
| Marketable securities |
508,354 | 739,936 | ||||||
| Accounts receivable, net |
257,266 | 210,151 | ||||||
| Inventory |
200,718 | 114,136 | ||||||
| Other |
216,704 | 250,153 | ||||||
| Total current assets |
1,454,574 | 1,663,477 | ||||||
| Property, plant and equipment, net |
149,202 | 330,913 | ||||||
| Intangibles, net |
105,825 | 13,983 | ||||||
| Goodwill |
155,626 | — | ||||||
| Other assets, net |
9,287 | 20,065 | ||||||
| $ | 1,874,514 | $ | 2,028,438 | |||||
| LIABILITIES AND EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 508,814 | $ | 415,971 | ||||
| Accrued liabilities |
339,617 | 277,455 | ||||||
| Accrued royalties |
47,394 | 48,488 | ||||||
| Other current liabilities |
246,685 | 257,090 | ||||||
| Total current liabilities |
1,142,510 | 999,004 | ||||||
| Long-term liabilities |
125,387 | 109,696 | ||||||
| Total liabilities |
1,267,897 | 1,108,700 | ||||||
| Commitments and Contingencies (Note 6) |
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| Series C redeemable, convertible preferred stock, $.01 par value, $200,000 liquidation value, 50 shares authorized, issued and outstanding |
198,878 | 197,720 | ||||||
| Stockholders’ equity: |
||||||||
| Series A convertible preferred stock, $.01 par value, $200,000 liquidation |
200,000 | 200,000 | ||||||
| Preferred stock, $.01 par value, 4,900 shares authorized; none issued and outstanding |
— | — | ||||||
| Class A common stock, nonvoting, $.01 par value, 1,000 shares authorized; |
— | — | ||||||
| Common stock, $.01 par value, 1,000,000 shares authorized; 372,677 and 324,392 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively |
3,727 | 3,244 | ||||||
| Additional paid-in capital |
955,236 | 734,550 | ||||||
| Unearned compensation |
(22,613 | ) | — | |||||
| Accumulated deficit |
(728,684 | ) | (218,571 | ) | ||||
| Accumulated other comprehensive income |
73 | 2,795 | ||||||
| Total stockholders’ equity |
407,739 | 722,018 | ||||||
| $ | 1,874,514 | $ | 2,028,438 | |||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the six months ended June 30, 2004 and 2003
(in thousands)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (504,534 | ) | $ | (267,482 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
72,295 | 87,342 | ||||||
| Deferred compensation amortization |
5,102 | — | ||||||
| Provision for doubtful accounts receivable |
5,901 | 6,812 | ||||||
| Write-downs of property and equipment |
144,614 | 41,035 | ||||||
| (Gain) loss on sales of investments |
(128 | ) | 994 | |||||
| Loss on sale of property, plant and equipment |
2,500 | — | ||||||
| Other, net |
(68 | ) | 687 | |||||
| Changes in operating assets and liabilities, net of effects of eMachines’ acquisition: |
||||||||
| Accounts receivable |
66,450 | (17,848 | ) | |||||
| Inventory |
59,118 | 15,261 | ||||||
| Other assets |
23,330 | 335,351 | ||||||
| Accounts payable |
(116,702 | ) | 19,544 | |||||
| Accrued liabilities |
32,291 | (121,194 | ) | |||||
| Accrued royalties |
(13,691 | ) | 9,982 | |||||
| Other liabilities |
(20,470 | ) | 7,646 | |||||
| Net cash (used in) provided by operating activities |
(243,992 | ) | 118,130 | |||||
| Cash flows from investing activities: |
||||||||
| Cash paid in acquisition of eMachines, net of cash acquired |
(41,350 | ) | — | |||||
| Capital expenditures |
(21,290 | ) | (30,098 | ) | ||||
| Proceeds from sale of property, plant and equipment |
12,086 | — | ||||||
| Proceeds from sales (purchases) of available-for-sale securities, net |
241,082 | (166,690 | ) | |||||
| Payment of shareholder note payable |
(22,448 | ) | — | |||||
| Proceeds from principal payments of notes receivable |
— | 20,045 | ||||||
| Net cash provided by (used in) investing activities |
168,080 | (176,743 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Payment of preferred stock dividends |
(4,420 | ) | (7,380 | ) | ||||
| Proceeds from common stock option exercises |
2,763 | — | ||||||
| Net cash used in financing activities |
(1,657 | ) | (7,380 | ) | ||||
| Net decrease in cash and cash equivalents |
(77,569 | ) | (65,993 | ) | ||||
| Cash and cash equivalents, beginning of period |
349,101 | 465,603 | ||||||
| Cash and cash equivalents, end of period |
$ | 271,532 | $ | 399,610 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
| Value of common stock issued in eMachines acquisition |
$ | 214,623 | ||||||
| See Note 9 for additional information related to the Company’s acquisition of eMachines |
|
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | General: |
The accompanying unaudited condensed consolidated financial statements of Gateway, Inc. (“Gateway” or “Company”) as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2003 and, in the opinion of management, reflect all adjustments necessary to fairly state the condensed consolidated financial position, results of operations and cash flows for the interim periods. All adjustments are of a normal, recurring nature except for certain asset impairments as discussed in (h) below and restructuring, transformation and integration charges as discussed in Note 7. The results for the interim periods are not necessarily indicative of results to be expected for any other interim period or the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with Gateway’s audited consolidated financial statements and notes thereto for the year ended December 31, 2003, which are included in Gateway’s 2003 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”).
Gateway sells its desktop and notebook computers (“PCs”) and PC-related products and services and convergence related consumer electronics products and services through its call centers, web site, direct sales force and third-party retail partners. Convergence and non-PC related products and services (“Convergence/non-PC”) consist of all products and services other than the PC, such as peripherals, software, accessories, extended warranty services, training, internet services, digital TVs, digital music players and enterprise system and networking products and services.
On March 11, 2004, Gateway completed its acquisition of eMachines, Inc., a privately-held computer distributor. These unaudited condensed consolidated financial statements include eMachines’ condensed consolidated balance sheet and results of operations subsequent to March 11, 2004. On April 9, 2004, Gateway closed its 188 retail stores to pursue wider distribution of its products through third-party retail partners (domestic and international) in addition to continued direct-sales of products to consumers and businesses via Gateway’s sales workforce, website and phone centers.
The significant accounting policies used in the preparation of the condensed consolidated financial statements of Gateway are as follows:
| (a) | Basis of Presentation: |
The condensed consolidated financial statements include the accounts of Gateway and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to previously reported information to conform to current presentation. These reclassifications had no impact on previously reported net loss or stockholders’ equity.
| (b) | Use of Estimates: |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the Company’s provisions for sales returns, bad debts in accounts receivable, inventory obsolescence, product warranties and rebates, restructuring activities, tax assets and litigation matters.
| (c) | Cash and Cash Equivalents: |
Gateway considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of these investments